Franchisors Beware: New Joint-Employer Ruling Means You May Be Held Liable Too

The National Labor Relations Board changed the standard for defining joint employers in a 3-2 decision involving Browning-Ferris Industries of California, Inc. The General Counsel of the NLRB wants to apply that decision to the franchisor-franchisee model, with McDonald’s in his crosshairs. This initiative will likely influence other areas aside from the National Labor Relations Act–including the Wage and Hour department and Title VII (the Civil Rights Act, anti-discrimination legislation).

Previously, the NLRB determined joint employer status if the entities shared or codetermined mattters governing the essential terms and conditions of employment–things like supervision, scheduling, hiring, firing, or directing employees–and actually exercised that power. However, during the recent Browning-Ferris ruling, the NLRB considered whether an employer has exercised control over terms and conditions of employment “indirectly through an intermediary, or whether it has reserved the authority to do so.”

Browning-Ferris was a pretty standard temp agency case, and the NLRB recognized this when it adopted this new standard. They clarified that the decision didn’t apply to the franchisor-franchisee relationship, but in his amicus brief, the General Counsel Richard F. Griffin argued that the standard should be applied to the franchisor-franchisee relationship since franchisors typically dictate the terms of the franchise agreements and “can exert significant control over the day-to-day operations of their franchisees.” Now the GC is pursuing that ruling against McDonald’s.

If an employer has the ability to exercise control, even if it did not, it can be found to be a joint employer.

So, how could this affect us?

Recently, franchising has become incredibly popular in the salon space, with rental chains like Sola and Pheonix opening locations all over the country. Great Clips and Fantastic Sams are popular employee-based franchises. Even owners of privately held single-location salons have contacted me for franchising guidance. (Before you hit my contact button, my advice is this–don’t franchise. Maintain control of your brand. If you want to grow, open additional locations and find a good therapist. You’ll need one.)

Should the NLRB determine franchisors are joint employers with their franchisees, franchisors would be liable for the illegal actions of their franchisees. Should this change extend to the wage and hour, OSHA, and the FLSA, the joint employer could be on the hook for unpaid wages and other violations. (Remember the post about Papa Johns Jamil? If this becomes the new standard, Papa John himself could be in hot water too, right alongside his sleazy franchisee.)

Shouldn’t a company only be held liable for exploitative actions and violations they’re directly responsible for? If Papa John instructed Jailhouse Jamil to fabricate tax returns and manipulate time cards, then sure, throw their CEO in the clink right alongside him, but I’m fairly certain that wasn’t the case.

Then again, maybe it was.

At McDonald’s, according to one complaint, the franchisees are required to use McDonald’s-provided software to monitor the ratio of labor costs to revenues. When that ratio exceeds a corporate-set target, workers are told to wait for up to an hour to clock in, and managers direct workers to clock out for extended breaks until the target ratio is again achieved.

McDonald’s set these arbitrary performance ratios, and while they may not have instructed their franchisors to manipulate work hours directly, they placed them in a position where that manipulation was likely necessary to remain within the company’s performance parameters. McDonald’s Corporation also knowingly tolerated this practice, in violation of federal labor law. Certainly, failing to report or rectify these violations should be considered serious crimes, since they essentially endorse the exploitative practices of the franchisees.

Anyways, if you’re a franchisor, read this article by Kevin Harlow over at DLA Piper, where he provides advice for how franchisors can take steps to minimize their risk. Both the NLRB General Counsel and the Administrator of the Wage and Hour Division of the US Department of Labor are scheduled to address the franchise industry at the ABA Forum on Franchising in October in New Orleans.

For more information on this ruling and the potential consequences of this expansion in the determination of joint employer status, read this post by Robert G. Brody and Alander Friedman over at Brody and Associates employment law blog.